European Financial and Accounting Journal 2013, 8(1):39-66 | DOI: 10.18267/j.efaj.95

Volatility Asset Pricing Model as an Alternative Approach?

Robert G. Kuklik¹, Vladislav Vacek²

¹ Robert G. Kuklik, MBA - Ph.D. student; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic; .

² Ing. Vladislav Vacek - Ph.D. student; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Prague, W. Churchill Sq. 4, 130 67 Prague 3, Czech Republic; .

The reality of contemporary developments in the capital markets indicates that they do not lend themselves to the deductive theory based on simplified rationality of the physical world. The behaviour of the markets cannot be derived from rather bare postulates of the so called "random walk" process and the "normal distribution" of investments' returns. It in fact relates to a variety of different. even behavioural factors. The riskreturn relationship is not therefore stable over time and investors cannot rely on the comforting message that all you need to do in order to obtain an expected return is only to decide the appropriate level of risk. There are therefore serious doubts about the Efficient Market Hypothesis with e.g. the CAPM. SIM and MIM frameworks. The multifractal view of e.g. Mandelbrot concerning the market behaviour. has inspired the outline of the Volatility Asset Pricing Model (VAPM) based on the market's expected volatility and the serial dependence on the past return's performance. both reflecting the total market risk of an investment. In view of a further research this model has been so far successfully tested as well as presented.

Keywords: CAPM, Efficient Market Hypothesis, Markowitz' mean-variance maxim, MIM, Multifractal view, Random walk, Serial dependence, SIM, Total risk, Volatility

JEL classification: G12

Published: March 1, 2013  Show citation